As regulatory reporting challenges mount for the crypto industry, let’s take a look at the 5 most common tax reporting and compliance problems that crypto exchanges struggle with.
The crypto industry is still in its infancy. The fact that millions of dollars are being exchanged daily for virtual currencies and assets is quite astonishing. This gives us insights into the fact that the fad around cryptocurrencies and virtual assets is not going away anytime soon.
But according to several economists and critics, the crypto market has just learned how to crawl, if that. This means the current success and growth rate that the crypto industry is observing is likely to increase by 3X by the end of the decade.
The current global economic circumstances, inflation, and the fad around owning virtual assets are collectively adding to the general idea of creating multiple income streams. Crypto, having caught the attention for its quick ROIs and above-par profit margins, is notoriously catching on to taxpayers’ inherent demand for financial security.
This brings us to the obvious part of the virtual trend – sustainability and regulation. The crypto market doesn’t have either (at the moment). While crypto enthusiasts and billionaires continue to vouch for virtual currencies, irregularities and risks within the crypto exchanges continue to be ignored.
So, this calls us to question; how are crypto exchanges, virtual asset providers, crypto traders, and anonymous crypto investors dealing with the tax reporting requirements? What kind of tax reporting complexities do crypto exchanges particularly come across?
So, today, we will be discussing the five most common issues that the crypto economy is struggling with as follows.
1) No Access To Transactional Data
Businesses within the crypto market have limited or no access to transactional data due to the inherent anonymous trading features of the exchange platforms. This makes it difficult to record and identify the individuals and entities involved in a transaction.
Further, when businesses do have access to transactional data, the user identifications are usually unclear, making it harder to report. As the volume of transactions is really, it gets harder to identify the traders and comply with the reporting requirements.
2) Nondisclosure Of Gains On Crypto Exchanges
The reason many entities and individuals alike engage in crypto exchange is because of the high-profit margins it offers. A single virtual coin like Bitcoin is priced at around $40,000 as we’re writing this.
While all these gains and profits are pretty eye-catching, so is the tax burden that comes along with it. Hence, many entities and individuals that are engaged in crypto exchanges choose to hide their capital gains.
It is also interesting to know that the IRS treats virtual assets and cryptocurrencies like “real” physical properties. This means any capital gains you make on the virtual currencies and assets have to be reported on Form 8949.
And because many choose to hide their incomes to avoid taxes, regulatory reporting is compromised.
3) Underestimating The Tax Implications Of Crypto Exchange
The IRS is coming for tax-evading individuals and entities. When people hide their massive monetary profits generated through crypto exchanges, they are failing to understand that all gains are gains – virtual or real. And they will be taxed.
And just like a regular tax evader, a crypto trader will also be subject to stern notices, penalties per violation, and legal assessments from the IRS, if not more.
The IRS tends to penalize you more when you willfully disregard your tax compliance responsibilities. These assessments could be so taxing that all the gains and profits you have made would evaporate into big checks that you will have to sign to settle the lawsuits.
Additionally, crypto exchange is a blissful medium for those who willfully and collectively hide their incomes, and this makes it hard for fair traders, such as yourself, to obtain the tax details of your brokers, intermediaries, traders, recipients, and more. This will disrupt and complicate your tax reporting regimes as well. Know more about the tax implications of cryptocurrency.
4) Throwing A Blind Eye To Regulatory Risks
Penalties are not even the beginning of what could be your worst nightmare. Crypto exchanges make it practically impossible to identify the primary user that you trade with. However, the IRS and federal organizations are still watching them.
If an anonymous trader turns out to be a terrorist or a notorious money launderer associated with a terrorism-funding organization, the individual or entity that traded with the money launderer may also be executed for engaging in terrorism-funding regimes and violating the national security regulations.
While these are extreme occurrences, they happen more often than you think. This is why the IRS and federal organizations advise all crypto enthusiasts to have an identity validation regime in place to avoid trading with high-risk profiles. But the virtual currency ecosystem is so dynamically layered and flawed that regulatory risk is inevitable.
5) Tax Automation Issues
Not everyone that wants to engage in crypto exchange is a fraud. Many individuals and entities in the crypto market engage in fair business practices to comply with the IRS and other federal regulations.
However, despite the earnest efforts, some automation inconsistencies hinder regulatory reporting. Some businesses may not be aware of dynamic tax automation tools that do a fantastic job at enabling tax and regulatory reporting.
While others may not be aware of how such tools blend into their business ecosystems. A lack of awareness is one reason, but the very automation solution and its flawed infrastructure could be another reason for reporting inconsistencies.
Businesses have to spend some time on research, look at the reporting trends, and understand how a certain automated solution could support their unique reporting requirements, especially in the long haul.
There are dozens of crypto-friendly regulatory platforms out there that offer automated solutions, but only a few make the cut. The volume of transactions, reporting framework, and ease of usage must be considered when choosing a solution while also paying attention to the obvious credibility of the platform.
While negligible and occasional errors are probable anywhere, the bigger goals, which are improving tax compliance and streamlining regulatory reporting have to be prioritized universally.